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Relationship between Customer Loyalty and Profitability

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Read this article to learn about the relationship between customer loyalty and profitability!

Relationship between loyalty and profitability of customers needs to be ascertained before planning which type of loyal customers are truly profitable for companies. All loyal customers should not be pursued or retained.

The best customers are believed to be the loyal ones. The loyal customers are supposed to cost less to serve, they are willing to pay more than other customers and they act as word-of-mouth promoters for the company. It is believed that one sure way to earn greater profits is to win the loyalty of customers. But when the loyal customers are studied for their profitability to the company, the picture is not as neat as has always been believed.

1. It is normally believed that loyal customers are cheaper to serve because the up-front cost of acquiring them are spread over a larger number of transactions. But this may not be true. Loyal customers may actually be more expensive to serve. In business markets such loyal customers do business in high volumes, know their value to the company and often exploit it to get premium service and price discounts. In some industries, it may be cheaper to serve loyal customers but those industries will have to be identified before managers start engendering loyalty among its customers.

2. Long-term customers consistently pay less than the newer customers do. This is true for business markets as well as for consumer markets. This may happen because loyal customers are more knowledgeable about the product’s quality and can develop accurate reference prices and make better judgments about the value of the product or service than sporadic customers can. Loyal customers also believe that they deserve lower prices because companies profit from their buying consistently from them.

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3. People who feel and talk positively about a company are also more likely to sell others on the company. Most companies measure loyalty purely on the basis of purchase behaviour and do not conduct attitudinal surveys. Customers may keep buying from a company out of inertia and convenience but may not become advocates of the company. They will advocate a company only when they feel positively about it. And customers who are loyal in terms of their purchase behaviour do not necessarily feel positively about the company. A company will have to be more useful and engaging with the customer to move him from being a loyal customer to becoming an advocate of the company.

4. The most common way to sort customers is to score them according to how often they make purchases and how much they spend. The more items a customer purchases and more recent the transactions, the more important is the customer to the company, and the more the resources that the company lavishes on him. This method can result in a company targeting wrong customers for loyalty programs because customers buy with different periodicities and in different amounts, each time they decide to buy. It is important to scrutinize customer transaction data carefully in terms of profits they generate for the company before companies settle on the customers that they will try to retain by offering incentives.

5. After analysing customer profitability and projected duration of their relationships, it is time to categorize them and treat them differently. Customers who have no loyalty and bring in no profits should not attract any investments from the company. The strategy for customers who are profitable but disloyal is to milk them for the short time that they are buying from the company, but a soft approach is appropriate for profitable customers who are likely to be loyal. For highly loyal but not very profitable customers, the emphasis should be on making them spend more.

6. Profitable loyal customers are satisfied with existing arrangements and it is a bad idea to intensify the level of contact with them as they may be put off by more calls and mails. The company should concentrate on finding ways to engender positive feelings about the company among these customers. Depending upon the type of business it is in, the company can involve these customers in more activities of the company. A customer who feels and talks positively about the company is the most valuable customer of the company.

7. It is very difficult to convert profitable but transient customers into loyal ones by spending on them. These customers are deal-prone. The company should hard sell to them through promotions and mailing blitzes that should include special offers on other products. These customers should be contacted intensively and shortly after their latest purchase, and there should be a reminder call or mail after some time interval. If the customer does not respond, he should not be contacted again.

8. The customers whose size and volume of transactions are low can be of two types. If these customers do not have adequate spending power, they should be dropped. But if they can spend more, they should be pursued. The customers who can be potentially profitable should be offered other products.